Hong Kong, China – While dozens of protesters barricaded themselves into a university in Hong Kong last week with riot police waiting outside, the latest chapter in nearly six months of often violent anti-government demonstrations, the territory’s stock market was rallying.
The Hang Seng Index, which tracks the largest 50 companies listed in Hong Kong, jumped almost three percent in the three days to November 19.
The move in share prices was a reflection of the progress that was reportedly being made to resolve the United States–China trade war during long-distance phone conversations between officials in Beijing and Washington, DC, rather than the petrol bombs and tear gas that were being fired off on the city’s streets.
And a huge swing towards pro-democracy candidates in this weekend’s local council elections in Hong Kong sent stocks higher again on Monday.
Meanwhile, mainland Chinese e-commerce giant Alibaba is getting ready to launch on Tuesday what could become one of the world’s largest initial public offerings (IPOs) this year, and the biggest in Hong Kong in nearly 10 years, with a $13bn share sale.
All these developments show the immense challenges and opportunities that Hong Kong faces in the coming years as it seeks to defend its status as one of the most open economies in the world. And a proposed law that would reverse the way the US treats Hong Kong if it is passed is adding to the concerns among the territory’s investors.
Despite the territory falling into a recession because of the double-whammy of the protests and the trade war, analysts say there are many reasons why Alibaba has chosen Hong Kong as the second venue to list its shares after New York.
The protests are being driven by frustration at what many see as a squeeze on the territory’s freedoms by Beijing, and on people’s living standards due in large part to rising housing costs.
A sort of homecoming
So the upcoming secondary listing of Alibaba – its debut on the New York Stock Exchange in 2014 remains the world’s largest IPO to date – is being seen by many analysts as a big win for Hong Kong, the company and Beijing.
The company priced its Hong Kong shares at a 2.6 percent discount to its New-York traded securities.
“The company is pricing its shares at a slightly lower-than-expected level to ensure the listing gets a lot of interest,” Philip Ho, director of BCP Investment Limited, told Al Jazeera.
Bright Smart Securities estimated that the listing could increase the trading volume of the Hang Seng Index by around 10 percent.
“The homecoming for Alibaba at this period of time is certainly welcomed by locals here and provided a much-needed boost of confidence,” a Hong Kong-based equity analyst who asked not to be identified told Al Jazeera. “It could create a trend and encourage other mainland business to come list in Hong Kong, instead of prioritising the US markets.”
The analyst’s request for anonymity is not entirely surprising given recent events. Shops and other businesses that even appear to be supportive of Beijing have been singled out by protesters in recent weeks, while pro-Beijing politician Junius Ho was stabbed in the chest earlier this month.
“Hong Kong’s status of one of the world’s top international financial hubs is endangered,” the analyst said.
That status may be at risk, but Hong Kong remains enormously attractive for companies looking to raise funds for many reasons.
“Hong Kong is one of the world’s most active markets for initial public offerings, with $36.7bn raised in 2018,” says the Hong Kong Trade Development Council.
According to the World Federation of Exchanges, Hong Kong’s stock exchange is the fifth-largest in terms of market capitalisation, after the New York Stock Exchange, the Nasdaq, Tokyo and Shanghai.
Size matters when it comes to exchanges. The more buyers and sellers there are on one, the greater the chances a company has of raising large amounts of money.
Also, unlike mainland China, Hong Kong does not place restrictions on companies looking to move funds into or out of the territory.
And crucially, Hong Kong retains a legal system that is still viewed by most observers as being fair and transparent under the “One Country, Two Systems” agreement between the United Kingdom and China when London handed the territory back to Beijing in 1997.
For Alibaba, having a secondary listing in China gives it access to mainland investors who want to buy into the country’s biggest overseas corporate success story. It also means its shares can be traded almost around the clock between Hong Kong and New York.
Hong Kong’s high exposure to the outside world has been both a blessing and a curse for the city’s economy over the last year.
It is a major gateway for goods and financial services moving into and out of mainland China, leaving it vulnerable to the continuing trade war with the US. But as the US and China appeared to be edging closer towards agreeing to a preliminary trade deal last week, stock prices rallied.
Hong Kong’s status as an international city has grown in recent years. The number of foreign companies that have set up Asian regional headquarters in Hong Kong has increased 10 percent to 1,541 since 2015, according to the Hong Kong Census and Statistics Department.
It is one of the world’s most important financial hubs with total banking, fund and wealth management assets worth more than $6 trillion, based on figures compiled by Reuters.
And many of the 50 companies that comprise the benchmark Hang Seng Index, like banking giant HSBC, Chinese tech firm Tencent and energy company Petrochina, derive most of their revenues and profits from outside Hong Kong.
Which is just as well for these companies.
As the protests worsened, retail sales fell by the most on record in August, and then plunged again in September, contributing to the territory’s first recession in 10 years as economic output contracted in the second and third quarters.
Small and medium-sized firms are suffering from cash flow problems, while many restaurants and shops have shut down.
So while Hong Kong’s global profile has given investors a certain degree of protection from the protests, it has exposed them to the vagaries of the US-China trade negotiations.
More clouds on the horizon?
But a development that ties the protests in to the trade war is starting to worry investors even more.
Hong Kong has so far been exempted from the import tariffs the US has applied against Chinese goods during the trade war because of an act passed in 1992 by the US Congress which treats Hong Kong differently from mainland China.
But under a new bill, which has been passed by both houses of the US Congress with bipartisan support, the US would have to reassess Hong Kong’s autonomy every year. The measure is meant to ensure that Beijing does not intervene in Hong Kong’s affairs directly, as many of the protesters fear it might do if the demonstrations continue to rock the territory.
Officials seen as violating human rights could also face sanctions under the proposal.
It now needs President Donald Trump‘s signature to become law.
Analysts fear the bill could drastically alter Hong Kong’s status as a free port and affect its financial markets, including its long-standing currency peg to the US dollar.
“The main threat to the Hong Kong dollar peg is the potential suspension of America’s 1992 Hong Kong Act. This would be a serious escalation of the Sino-US geopolitical confrontation but, with Hong Kong careering towards more violence and chaos, it is an outcome that should not be discounted,” said Diana Choyleva, chief economist at Enodo Economics, in a note to clients.
At a weekly news conference on November 20, Geng Shuang, the spokesman for China’s Ministry of Foreign Affairs, said the bill “will not only undermine China’s interests but also US interests in Hong Kong.”
Analysts are also worried about how the proposed law would affect attempts to resolve the US-China trade war.
“While it is not clear what kind of long term impact the bill would have on Hong Kong’s markets, in the shorter term the act is likely to negatively impact the Sino-US trade talk progress and, in turn, worsen Hong Kong’s economy even further,” said Chan Lok, Vice President of Target Capital Management Ltd.
“Although I believe it is largely symbolic, the decision of passing the democracy bill could still affect the relationship between Washington, Beijing and Hong Kong,” Chan told Al Jazeera.